Is the U.S. Government Underestimating the Cost of Climate Change?

A multi-agency effort to nail down the social cost of carbon emissions ignores wrenching climate impacts such as ocean acidification and makes efforts to curb emissions seem disproportionately expensive, economists say

All those insults and changes resulting from climate disruption add up quickly: $15 billion for Midwest farmers staring at a year of crop loss and rebuilding as the Mississippi River floods; 600 deaths and 1,000 hospitalizations as a heat wave bakes Chicago; and $147 million gone as Alaska's king crab fishery succumbs to acidification and changing prey/predator structures.

The total cost of climate change seems impossible to pin down, given the uncertainties. But an assortment of climate researchers and economists are now chasing after that sum, attempting to arrive at a bottom line.

In February an inter-agency workgroup released the administration's best guess of what each ton of carbon dioxide dumped in the atmosphere costs society: $21, plus or minus, or roughly $121 billion worth of damages annually as a result of U.S. carbon dioxide emissions.

Until this summer, the exercise was mostly academic. No more. The death of cap-and-trade and the shift in Congress following the mid-term elections means that bottom line has the potential to shape U.S. climate policy for the foreseeable future.

As federal agencies like the U.S. Environmental Protection Agency take the lead to limit emissions, their proposals must balance the cost of new restrictions against benefit of avoiding climate change impacts.

That's because the costs of averting global change are also steep: Trillions of dollars to rework energy infrastructure, change habits, upgrade housing stock and capture and sequester planet-warming emissions, just to start.

The lower the estimated cost of disruption - known as the "social cost of carbon" - the less action the Obama Administration can justify. And several economists and scientists fear that the Administration has low-balled the figure, handicapping its ability to curb emissions.

"It's like a volume dial on regulation," said Kristen Sheeran, executive director for the Economics for Equity and the Environment Network. "The higher the social cost of carbon, the more stringent those regulations can be."

"My fear is that they're going right back to the exact same models that have provided a lot of grist for the justification of inaction in the first place."

Those models provide the best information to date, said Richard Tol, a research professor at the Economic and Social Research Institute in Dublin, Ireland, who developed one of the three impact models used by the federal government.

More research will help narrow the range of uncertainty, he said, but the numbers the federal government has picked reflect established, peer-reviewed science. "The number is not precise, but it's not a crazy number."

The $21 figure came from an inter-agency effort consisting of representatives from 12 federal agencies. It has become the default value for government benefit-cost analyses; efforts by individual agencies to assess the value of emissions reductions have largely ceased. In recent months the Department of Energy has cited that figure to assess the impact of new air conditioning efficiency standards, and the EPA cites it in the agency's analysis of greenhouse gas emissions from light trucks, among others.

But the figure is low, critics say - a danger that will become apparent as the administration tries to justify additional and more ambitious mitigation efforts. If capturing carbon emissions from coal-fired power plants - a technology that does not exist commercially today - ends up costing only $30 per ton of carbon dioxide yet the benefit of keeping each ton out of the atmosphere is worth just $21, carbon sequestration would fail the benefit-cost test.

"If $21 a ton actually drove policy, where would we end up? Well, we'd end up with a whole lot more warming," said a former EPA official who declined to be identified because of his continuing work with federal agencies on the effort. "$21 a ton doesn't really justify much."

The U.S. Global Change Research Program backs that up. To limit atmospheric carbon levels to 450 parts-per-million using the least-expensive technologies available, carbon dioxide emissions would need to be valued between $36 and $88 per ton, it concluded in a 2007 report. Current atmospheric carbon levels are near 385 ppm, about 35 percent higher than pre-industrial levels. Science is not clear what level poses a threat, but some research suggests higher risk of dire consequences if atmospheric carbon were to increase above the 450 ppm threshold.

The federal value underestimates the impact in large part, economists say, because unknowns are unvalued in the analysis. Local and regional impacts? Ocean acidification? Catastrophic floods and wildfires? All are ignored in scenarios used by the administration. The science behind the models isn't precise enough.

"We don't have any numbers for any of these things," said David Weisbach, University of Chicago law professor and director of the school's law and economics program. "You can say lots of things - that it's a wild-assed guess - but it's sort of crazy to say this is how we're going to decide what we're going to do about climate change."

To be sure, the inter-agency group issued a range of numbers with its report in February: $5, $21, and $35 per ton of carbon dioxide. It also proposed a worst-case scenario - $65 per ton - meant to represent higher-than-expected impacts from temperature change. It also made clear that it will continue to revise its figures as the science improves.

The federal values are about a quarter of the range cited in one of the most oft-quoted economic analyses on climate change, the Stern Review, commissioned by the British government and authored by UK economist Sir Nicholas Stern. But the Stern Review, though rigorously reviewed, relied on unconventional and innovative analysis to arrive at a mid-range figure of about $85 per ton. Germany's environmental ministry pegs the value at about $95 per ton.

The Obama administration stuck with a more conventional accounting, one that, some economists say, is biased downward at every turn.

In a statement, Office of Management and Budget spokeswoman Meg Reilly said the cost estimates developed by the interagency working group "are presented as a range with acknowledgement of the many uncertainties involved. Agencies should calculate the social benefits of their regulations using the entire range identified in the document." Those estimates, the agency added, will be revisited within two years "or at such time as substantially updated models become available."

The EPA declined to make any experts available to speak on the record about the issue. It is holding a pair of invitation-only events in Washington, D.C., to explore the issue - one later this week to explore difficulties modeling and valuing climate impacts, the second in January to review research on impacts to such areas as agriculture, human health and ocean acidification, among others.

"The interagency process asked a bunch of very, very straight-laced and middle-of-the-road economists, and they came up with some ridiculous answers," said Jim Barrett, chief economist of the Clean Economy Development Center. "If you tweak a handful of those parameters ... the answer comes out to be radically different."

And that hints at a larger issue: That climate change simply does not lend itself to cost-benefit analysis. It is a moral and political issue, similar to abortion or human rights, say some economists. The political questions dominate the economic ones.

For example, asks Jonathan Masur, assistant professor of law at the University of Chicago, what if China, the world's largest carbon-dioxide emitter, seizes on the United States' effort to curb emissions as an opportunity to burn more coal? Or the opposite - what if the world, heartened by America's restraint, agrees on a global treaty to curb greenhouse gases?

"You can't just put a bunch of economists in a room and get an answer out of them," said Masur, "As a purely technical matter, this number, $21.40, might very well be off by a factor of 10 in either direction."

But others who support cost-benefit analysis say this uncertainty can be overcome. "We cannot produce perfect benefit-cost analyses of carbon control," said John Graham, who headed the Office of Information and Regulatory Affairs under President George W. Bush and now is dean of the Indiana University School of Public and Environmental Affairs.

"But that does not mean the regulators should be banned from seeing cost-benefit information," he added. "That is a straw man created by zealots who think climate policy can be determined without considering costs and benefits."

Even a wide range of estimates offers enough information to favor some policies and rule out others, he said.

And that's exactly what keeps Tol working on his models.

"We have to do this. We have to come up with an estimate. The alternative is to provide no guidance whatsoever to the policy process."